Sri Lanka central bank raises policy rate to 8.75%

Sri Lanka's central bank unexpectedly raised its key policy interest rate by a full percentage point on Tuesday, a sharp move aimed at combating rising inflation and supporting the national currency amid economic pressures stemming from conflict in the Middle East. The Monetary Policy Board increased the overnight policy rate to 8.75 percent from 7.75 percent, marking the largest single hike in three years.

The decision, which surprised many analysts who had anticipated a smaller adjustment, reflects growing concern over domestic price stability. Officials cited heightened global tensions and sustained high commodity prices, particularly for petroleum, as primary drivers. Sri Lanka, which relies entirely on imported fuel, has been forced to implement significant domestic energy price increases and other austerity measures.

Annual inflation accelerated to 5.4 percent in April, up from 2.2 percent in March, moving above the central bank's target of 5 percent. The institution stated that inflation is likely to remain above that target in the near term before easing. The Sri Lankan rupee has also faced notable depreciation pressures in recent weeks, declining significantly since...